Modes of Household Behavior and Labor Supply Decisions

We develop a modeling framework to examine household labor supply decisions that includes the husband’s and wife’s choice of whether to behave cooperatively. Our model is static and, as opposed to most applications of cooperative models to household labor supply decisions, allows for corner solutions. Spouses are wage-takers, have individual utility functions defined over own leisure and (public) household consumption, and face restrictions on the minimum number of hours that either can work. Given preferences, wage offers, and the minimum labor supply levels that both spouses face, the spouses simultaneously choose labor supply levels and whether to behave cooperatively. We show that in the absence of minimum labor supply levels, all households in which at least one person works will behave cooperatively, and equilibrium outcomes would have either both spouses participating in the labor market or neither. The model is estimated using household-level data from the Bank of Italy Survey. We show that increases in the female wage offer distribution increased the participation rate of married women over the decade of the 90s both through the standard substitution effect and by increasing the proportion of households adopting cooperative modes of behavior. Using model estimates we demonstrate that increases in the wage offer distribution to women can dramatically increase the labor supply of both wives and husbands, as would reductions in minimum hours of work levels.